Notes From Underground: What Has the Swiss Wrought (Or Why 2+2=5 Is the Paradigm of Global Macro)

We at Notes From Underground have been pondering the global macro landscape and waiting for the inevitable ECB meeting January 22, and, of course, the Greek elections on Sunday, January 25. While waiting for some sensibility from the EU, the SNB abruptly ended its ridiculous intervention policy, which I have been criticizing for the past 12 months. My readers are well aware–as are followers of Rick Santelli–that I have questioned the wisdom of SNB support of the 1.20 EUR/CHF level.

Last month, with the euro under pressure the SNB was forced to sell 33 BILLION SWISS FRANCS and purchase a basket of other currencies, principally euros. This massive amount of currency intervention failed to depreciate the Swiss on the crosses and thus the Swiss National Bank called the intervention policy KAPUT. The market was caught off guard and the policy announcement caused a massive 35% move in the EUR/CHF. (Blood is running throughout the global currency markets.) The SNB’s official release was a poor joke as the central bank claimed success with its policy: “While the Swiss Franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”

In further comedic statements, SNB CHAIRMAN THOMAS JORDAN added: “However, lower oil prices will stimulate growth globally, and this will influence economic developments in Switzerland positively.” And the coup de grace: “In concluding, let me emphasize that the SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future.” Pure unadulterated crap, Herr Jordan, for the SNB has zero credibility with the markets.

The real issue for the SWISS is that the SNB and other policy makers intensively campaigned against the recent Swiss referendum advising the SNB to purchase GOLD as a standard of its banks reserves. A wonderful opportunity was lost for the Swiss populace to achieve some semblance of national sanity. IF THE VOLATILITY WASN’T SO GREAT IT WOULD MAKE GREAT SENSE TO BUY GOLD AND SELL SWISS FRANCS FOR IF THE GNOMES OF SWITZERLAND HAVE LOST THE MARKETS’ RESPECT, ALL THE WORLD’S CENTRAL BANKS ARE ADRIFT ON A SEA OF LIQUIDITY.

The question in my mind is why the SNB decided to abandon the 1.20 peg today. Yes, the European Court of Justice rendered a preliminary opinion yesterday about the legality of the ECB’s OMT and QE programs, but the favorable leaning couldn’t have been a surprise to policy makers in Europe and Switzerland. The SNB‘s peg was put into place because of the fears of a quantitative easing program and it has been a fact that the largest continual buyer of European sovereign bonds has been the SNB as it took the euros it bought and purchased the BONDS of European sovereigns.

A QE program, then, was no surprise. IN MY MIND SOMETHING ELSE IS IN THE AIR. Here’s my conjecture: At the coming ECB meeting, Mario Draghi announces the specifics of a large QE program and his resignation as he returns to Italy to serve as the Italian president. In his place, ECB Executive Board Member and Bundesbank President Jens Weidmann is named ECB president. The Germans gain control of the ECB, which is a victory for Chancellor Merkel and calms the anti-ECB forces building in Germany. The QE program is put in place under German vigilance, which gives it great international credibility.

The French will be unhappy but the Dutch, French and Italians have served as ECB president so why not a German, especially as it will be German money providing the ECB‘s capital backstop. The EURO rallies as the steadfastness of Weidmann is appreciated  and the Swiss will be able to sell their massive European sovereign bond portfolio to a willing ECB buyer for very nice rates and eventually ease the burden of owning far too many euros. The SNB would cut their enormous losses and be able to calm the anger of its Swiss citizens. THIS IS ONLY CONJECTURE BUT THAT IS WHAT PULLING THE PEG AND GOING TO 1% NEGATIVE RATES WAS TWO MONTHS AGO. Volatility anyone!?!?

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31 Responses to “Notes From Underground: What Has the Swiss Wrought (Or Why 2+2=5 Is the Paradigm of Global Macro)”

  1. ShockedToFindGambling Says:

    Yra- I have the feeling the ECB is going to do a half-assed QE and throw the markets into turmoil.

  2. Yra Says:

    Shocked—maybe,but it will be met with great volatility and equity markets will shake–especially as the DAX has recently had a sustained bid

  3. Chicken Says:

    Not only do SNB’s actions make them look foolish but these interventions turn global markets into nothing more than a casino.

  4. Bill Says:

    Jens Weidmann will never do QE. He may become the ECB president in the future but he is not putting at stake his reputation by rolling out a QE program when he very well knows it will not help the european economy long term. Plus the market would never trust a guy like Weidmann to implement QE, they know in his heart he does not believe in it.

  5. Chicken Says:

    And recently, German political figures have suggested that a Grexit would be acceptable, if my understanding is correct.

  6. Chems Says:

    Yra, how are you trading this?

  7. ARTHUR Says:

    Geo-political factors are important when anticipating ECB actions. All central banks are political to some extent. So the Swiss franc is not a safe haven after all? How about gold then? At $1,260.79 an ounce, gold is trading at a near four-month high.

  8. Rob Syp Says:

    The Swiss Franc 15 minute chart at the CME is scary. If you were short even with protective stop you paid dearly. A gentleman on CNBC said retail investors in the currency markets is not for the faint of heart.

    It’s another reminder that this is a dangerous game!

  9. Yra Says:

    Chems–very cautiously as the dust still has not settled and the margin clerks have not completed their tasks,as shown by the late 600 point rally in the IMM Swiss Franc yesterday afternoon—taking what the market will give and treading carefully—my mind has big ideas but my risk management skills put the brakes on—the U.S. debt markets are one barometer as of course is the oil market—but the algos are breaking down causing a rise in uncertainty and by definition volatility.The central banks have provided the basis for low volatility risk as meant increased risk taking by investors which was what Jeremy Stein forewarned his FOMC compatriots about–make sure you can establish sensible risk parameters before executing.The quants with mathematical models based on volatility fell into the trap of the swiss franc–global macro saw the flat line of the Eur/Chf with massive SNB intervention as a sign of caution

  10. alwaysincredulous Says:

    If the SNB starts unloading their holdings into the ECB, it means that 1. unsterlized QE has already happened and is very much priced in to sovereign yields, 2. any action by the ECB is going to be muted, simply because the SNB is just going to unload into them, so not much new net effect.

  11. JB Says:

    Second to last paragraph poses a contradiction. If you believed the Germans were taking over the ECB why take a massive loss on your EUR holding? The bid in EURO bonds would provide the demand to bail you out of your EUR

  12. Michael Greenberg Says:

    Sometimes the best trade is no trade at all.

  13. What’s Margin Really? Points and Figures Says:

    […] Harris covers the technical aspects of the currency move.  What’s interesting to me is that world currency brokers are scraping […]

  14. pittrader1988 Says:

    one lesson is risk, catastrophic risk and margin. clearly the currency brokers of the world forgot or didn’t learn this lesson. better to trade emini currencies at a regulated futures exchange than take a flyer in a currency brokerage that doesn’t understand risk.

  15. Chicken Says:

    Gold – The most psychotic commodity ever.

  16. Chicken Says:

    Can’t we assume the QE plans are leaked, thus the reaction is being priced in prior to the event?

  17. Chicken Says:

    Some of the PM miners are up a couple pennies, which means about a +20% day.

  18. ARTHUR Says:

    Gordon Gekko: The most valuable commodity I know of is information… ECB QE and Davos at the same time. Ha!

  19. Bill Henner Says:

    For the last 2 years in my role as an educator I have told students to avoid trading the Swiss. With the peg there was no reason to trade Swiss when the much more liquid Euro was available. It appears that many retail forex traders were long EURCHF, causing severe issues for the major brokers as customers sustained losses far in excess of their account size. It seems to me that the only reason to have that trade on would be to collect the interest that it paid. I believe the old expression was: “Picking up nickels in front of a steamroller”.

  20. Arthur Says:

    luxury real estate is the new Swiss bank account.

  21. tw Says:

    The Swiss appear to have reminded everyone that one does not always get forward guidance or inside info before something big happens.

    When you see more and more of these seemingly unexpected events and outsized moves, all one has to wonder is: what is next?

  22. Yra Says:

    JB–you make a good point and one I have thought about in reference to the aforementioned paragraph—but either way the SNB is stuck with EUROs either as sovereign debt or cash.Forbes has an article today conjecturing that the SNB was told by the ECB to end the peg and get out of the business if buying Euros and impacting the QE program—if the QE were a trillion the SNB would by default have to purchase massive amounts of EUROS and that was not a realistic approach for the Swiss but it is exactly that reality that made the PEG1.20 such a ridiculous policy to begin with–if the Euro collapses to 1.00 on an aggressive QE program the SNB is saddled with enormous loses so the SNB needs to hope for a German lead ECB to at least have some chance of salvaging a very poorly conceived policy–but relinquishing the soveregin bonds to the coffers of the ECB would be the beginning of a withdrawal and in the words of the SNB’s campaign against the gold referendum,provide the SNB with greater flexibility.A second CONTRADICTION is that the market has rewarded the SNB by driving up the value of the Swiss Franc for ending a self created fiasco—it appears that the market will be off balance for many moons–

  23. Yra Says:

    Bill Henner–nice to hear from you and the point is right on–the market has been punished by shorting swiss ,as a “cheap” derivative of the underlying Euro—pennies in front of a steamroller indeed

  24. arthur Says:

    The Swiss central bank is “simply” switching fronts in a global currency war. (Or Why 2+2=5 Is the Paradigm of Global Macro)

  25. rockeye118 Says:

    What would a German led ECB do for the price of GOLD? The Swiss knew releasing the peg would LAUNCH their currency, a huge change from the week prior,supposedly. Could that change in philosophy also translate into a change in the SNB’s GOLD reserve stance? I have been burned on the gold trade over the last three years, but GOLD’s increase with the increase in the USD has me perplexed.

    BTW, somebody was in the know weeks/months prior… Yra had mentioned several times on this blog site with the question: WHO is buying up the Swissie knowing the peg was supposed to last into the foreseeable future? I wonder what the answer is to that question? The SNB has lost credibility, even though they did the right thing by releasing their peg. The way they did it was dishonest and sketchy to say the least…

    Going to be an interesting year!

  26. Yra Says:

    Rockeye–it seems that Ms.Lagarde was upset she was not informed –lost profit potential because if the IMF operates as Congress there is no such thing as insider trading on privileged information

  27. Yra Says:

    Rockeye –on the GOLD–it is perplexing but as I have maintained over the last few years–Gold is a currency that is a proxy for investors respect for central banks and their fiat currency.It is interesting that the talking heads on CNBC who have laughed at GOLD as a hedge against inflation have no answer for the Gold performance since the November 30th –Swiss referendum.Deflation is all the talk but yet Gold has found some strength–global investors fear the central banks and their response to deflation in an ultra low interest rate environment.You raise an interesting point on the ECB–if Weidmann is appointed to head the ECB the GOLD will probably sell off in response–but that is a critical element to watch for—thanks for the great input.As you point out Notes From Underground has raised the Swiss issue for many months as well as a few times with Santelli–this raises the deep philosophical question–if knowledge emanates from Chicago does any talking head in New York hear it?

  28. ShockedToFindGambling Says:

    YRA and Rockeye- If the worldwide disinflation/weak economy was to accelerate, a lot of the assets with counterparty risk (basically everything including currencies and sovereign debt) will be endangered. So I think the rally in gold/silver makes sense, despite low inflation.


    • rockeye118 Says:

      has there been an official statement from SNB on why they removed the peg?

    • alwaysincredulous Says:

      you also have a lot of emerging market rich folk who don’t enjoy their wealth disappearing and are shocked, SHOCKED, that their equities aren’t holding value in real terms, i am sure.

  29. SackOfHammers Says:

    The EU is going to do nothing, as usual. The Swiss are just freefloating their currency as that is the “new system” according to ex-BIS economist Bill White. Gold will soon be a balance of trade asset for this systems currency swaps.

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